Archive for November 13th, 2011

“We have to keep the British economy safe, to take the British economy through this storm. That means preparing for all eventualities” British prime minister, David Cameronspeaking on 10th November in the UK and responding to concerns about the EuroZone

Germany is reportedly doing it, the British prime minister has admitted the UK is doing it, the French are strongly suspected of doing it, but when asked if Ireland is preparing or has prepared a Plan B for dealing with a break-up of the EuroZone, Taoiseach Enda Kenny said last Tuesday 8th November 2011 that “on behalf of our own country he [Enda Kenny] had contributed to that debate [the EU summit last month which addressed Greek debt, European banks’ capital and expanding the EFSF]” and “unlike what happened here in this country a number of years ago, I [Enda Kenny] don’t expect that if a crisis does arise within the EuroZone that it [Plan B] will be took at 2.30 or 3.30 in the morning with nobody present except a very few, I would expect that the leadership of the EuroZone would call a special council meeting if there is to be a special focus on any particular crisis or any particular aspect of a crisis. I expect that European leadership will deal with this politically” You would hope and pray that the Taoiseach avoided confirming the existence of a Plan B in order not to undermine confidence which might lead to the withdrawal of euros from Irish banks and conversion to a more secure currency (I suppose the good old Swiss Franc, but even the US dollar and sterling look strong compared to the euro at present); you would hope the NTMA and the Central Bank of Ireland and the Department of Finance have prepared a Plan B, and hope also that it is never needed.

There seems to be a lot of chatter presently flying through cyberspace about Ireland’s contingency planning for a break-up of the euro. But for the last couple of years there seems to have been periodic rumours about Punt Nuas being secretly printed at the Central Bank of Ireland in Dame Street, with stocks of the new currency all ready to be dispatched to banks once the mushroom cloud rises over the ECB in Frankfurt; normally the rumours are based on whispers by a friend whose boyfriend’s sister’s cousin twice-removed claimed that they’d seen actual evidence of the new currency. Of course there may be a secret store of a new currency but given the size of this small country, the fact that nothing concrete has leaked out suggests gossip and misinformation. The view on here is that there would be a number of future junctions to pass before the euro collapsed, there would at least be an attempt at closer fiscal union involving Ireland, an attempt to expand the ECB’s balance sheet (in other words printing more euros which would help indebted nations, and nations with deficits, but would tend to push up inflation) and a better attempt to recapitalise EuroZone banks, before France and Germany allowed a collapse. But you never know, and next weekend we may find that other EuroZone countries have deployed their long-prepared contingency plans and we are forced to manage our economy with Punt Nuas.

So what would that mean?

For the household, it would mean bank accounts denominated in euros would be converted to Punt Nuas and for the sake of simplicity let’s say EUR 1 = PNTn 1. The banks would also allow you to convert your notes and coins to Punt Nuas. Your borrowings from Irish institutions would be converted to Punt Nuas. So the Central Bank would need have a stock of notes and coins but remember that most money in the economy is in bank accounts.

For businesses, like households, their bank accounts, borrowings from Irish banks and cash on hand would be convertible to Punt Nuas. Sales would be in Punt Nuas so prices in the shops would be in Punt Nuas, your newspaper would in Punt Nuas and your salary and any welfare benefits would be paid in Punt Nuas.

For banks, they’ll need change the currency on their computer systems and ATMs, and they’ll need convert any cash on hand at the Central Bank of Ireland to Punt Nuas.

What about international debts? By default these will still be payable in the currency specified when the debt was incurred in the first place. I note that our bilateral bailout agreement with the UK requires us to repay the maximum of GBP 3.2bn in sterling in the event that the euro collapses. The worrying thing is that the betting is that following the creation of our currency, it will lose value against stronger currencies so these debts will increase. It is unclear how the remainder of our national debt will fare. It is also unclear how the Central Bank would limit the euros which it exchanged, presumably there would be a strict time-limit for exchange but there might need be further restrictions to stop euros in the other 16 countries being exchanged. And it is unclear if foreign currency accounts at Irish banks in Ireland would be affected, for example by a decree that they must be exchanged at a fixed rate.

Protecting your savings. Now this might be the subject which is soooo dangerous to talk about that Taoiseach Kenny gave the anodyne “it’ll be all okay” response when asked about Plan B in the Dail during the week. If the Punt Nua is to depreciate against established currencies then should businesses and households be converting euros now to a stronger currency? Notwithstanding the fact that exchange will carry a cost and commission, you’ll need find a foreign currency account, you may need access to the funds now to pay day-to-day expenses and you may find that you have exchanged your euros into a currency which loses value. So there’s no clear answer.

During the week it was claimed in the Irish media that there had been some 39 currency unions across the globe in the last century which failed but that subsequently “the sun rose in the morning” meaning that life went on after the break-up. Looking at the Wiki list of currency unions they all appear to be based on the gold standard or else a pegged to a traditionally strong currency like the US dollar or pound sterling. A break-up of the euro currency union between 17 developed countries, where the currency is not pegged to any external currency or standard, seems like a completely new proposition. The sun may well rise in the morning but a sudden euro collapse looks very messy indeed.

Poor old Kevin Cardiff, the Secretary General at the Department of Finance, still getting stick for the €3.6bn error revealed a fortnight ago in the national accounts. The conclusion of the internal review – terms of reference drafted by one K Cardiff – and an external review by an external investigator – the selection of which is by one, erm, K Cardiff – is still some weeks off, so we will have to wait to find out what went wrong with the General Government Debt calculation. Sources close to Kevin are now accusing the media of conducting a “witch hunt”, which seems inaccurate as we seem to have found the witch and its name is Kevin. An example of the correct use of the term “witch hunt” would be a senior Government figure accusing anyone who’ll listen of authoring the NAMA wine lake blog.

But having noted that Kevin was responsible for the management of an organisation which made a big mistake in calculating the GGD, and not ignoring the fact that he was in the thick of the banking crisis, including attendance at meetings with Messrs Lenihan and Cowen on the night of the bank guarantee, and not forgetting the claim in the Wikileaks cable release that Kevin “hinted” to the US ambassador before NAMA was created that the haircut on NAMA loans acquired from the banks would be 50% which would have called the whole NAMA project and Government strategy to deal with the banks into question; having noted all of that you can’t but help get the feeling that some people are taking advantage of Kevin’s difficulties to give a sly Father Dougal-like kick to a man on the ground, maybe to settle old scores or make political capital. The Government is standing by its nomination though, that Kevin is the best man in all the land to take on a €276,000-a year role* in Europe that even Kevin describes as a relative “doddle” and which others including past holders of the role describe as undemanding. But as big as Kevin’s €3.6bn error was, it didn’t involve real cash; there are concerns that errors of a similar magnitude – but this time involving real cash – are being made in other organs of Government.

Cast your mind back to July 2010 when NAMA produced its second business plan (the first one was labelled “draft”, the second one wasn’t and it is still the official version of what NAMA expects to do over its 10-year lifespan). The first plan was atrocious in its poor level of detail but it also got its projections wrong – badly wrong. The draft projected a 30% haircut on the loans acquired from the banks – in other words NAMA would pay 70c in the euro for the loans – the second plan haircut was at 50% and it looks as if the actual haircut, now that the loan acquisition phase has been largely completed, is close to 60% – in other words NAMA is paying 40c in the euro. NAMA blames the feckin’ banks for misleading it at the outset. But NAMA also reduced its lifetime operating costs from €2.6bn to €1.6bn in the second business plan, good news of course but it still doesn’t mask the fact that the agency made a 40% error. And NAMA had no-one to blame for this but itself. That was a €1bn error which involved real cash but as the error worked in NAMA’s favour, it was completely overlooked in the mainstream media. The disparity in treatment by the media of the two errors might now tempt Kevin to give his black cat a belt with the old broomstick.

But the NAMA business plan in 2010 is history. What about NAMA’s current exposure to Kevin Cardiff-size errors? The view on here is that NAMA has severely underestimated the carrying cost of loans in its portfolio. By carrying costs I mean the cost of insuring, maintaining and servicing distressed loans and properties. In the UK these carrying costs have been put at 5% of a loan’s value PER YEAR! With NAMA in charge of loans with a nominal value of €74bn and acquisition value of €32bn, 5% per year would make a severe dent in NAMA’s operations. NAMA has thus far escaped facing up to these costs because it has been busy acquiring the loans; the time has now come to deal with the carrying costs.

NAMA last week advertised for an insurance specialist provider to help the agency insure its portfolio. The Irish Independent reported that the cost of insurance to NAMA was contained in NAMA’s €130m a year operating costs, which seems unlikely to me because NAMA has to pay the banks €75m to manage the loans, it has its own internal operating costs of €45m and it has to pay Capita to provide an intermediate tier of management of the loans, and it will have other miscellaneous expenses – audit, tax, financial, legal, sales advice for example.

I’m not even going to try to estimate the insurance premiums on NAMA’s portfolio. NAMA says that many buildings are worth less than their rebuilding costs and rebuilding costs tend to be key to insurable valuations. How much does it cost to insure a grounded helicopter? How much does it cost to insure Noel Smyth’s repossessed art collection which some describe as knick-knacks but others say include important works of art? How much to insure individually crafted jewellery? And what exactly is NAMA going to insure? Just the foreclosed property being managed by the receivers? Or given that most developers are under water, all the property subject to NAMA loans? NAMA hasn’t responded to a week-old enquiry as to the quantum of its insurance costs or whether they are included in existing budgets.

And what about other costs of managing distressed loans and foreclosed property: legal costs, payment of developers’ salaries and overheads, receivers, estate agents and property management agents, security and maintenance, especially of vacant property and half built estates which seem to be constantly targeted by thieves principally attracted to piping and wiring which is sold on as scrap metal; fixtures are also routinely removed. And those may be the fortunate properties, NAMA has suffered a spate of fires on its properties and others have been flooded when piping has been removed.

These carrying costs including insurance should be clarified in time as we get to see NAMA’s accounts; we’ve been waiting six weeks for Kevin’s department to release the NAMA accounts for Q2, 2011 which were delivered to Kevin on 30th September, 2011. But then again, this is a busy season for witches.